Download Technology cycles and technology revolutions

“Technology cycles and technology revolutions”
by
Luigi Paganetto and Pasquale Lucio Scandizzo
University of Rome “Tor Vergata”
1. Introduction
Technological cycles have been characterized as the basis of
long and continuous periods
economic growth through sustained changes in total factor productivity. While this hypothesis is in
part consistent with several theories of growth, the sheer magnitude and length of the economic
revolutions experienced by humankind seems to indicate that a fuller explanation than those provided
by these theories may be in order.
As Douglas North (1981) argues, the industrial revolution has been characterized by a first
phase of technological advancements, followed by organizational changes that have primarily sought
to exploit the scale economies in mass production. These changes, in turn , have caused a number of
transaction costs internal to the firm to arise, mainly for what concerns the measurements of the
quality of inputs and outputs devised to control the increasing division of labor. The rise of the
transaction costs of the assembly line have eventually determined the demise of the Fordist model and
the end of the main technological cycle in the second half of the twentieth century. According to this
interpretation, the main industrial revolution thus mirrored, in a broad sense, the process of the
emergence of the modern firm from the market, as described by Coase (1937), i.e. a process of
development of large structures of command and control to reduce transaction costs external to the
firm, long hierarchical chains of
division of labor and growing internal transaction costs for
supervision, measurement and quality control. Technology, in this respect, had long finished its
leading role when the Fordist model entered in its post-industrial crisis in the 1970’s, while the new
technological cycle, based on the joint development of the personal computer and internet, although in
the making, was only slowly coming on stage.
The role of technology in raising total factor productivity was, of course, essential in the
industrial revolution, but, to a large extent, it was determinant only to establish the conditions for a
spectacular increase in high speed throughput ( North, 1981; Chandler, 1977), i.e. both in an increase
in output and in a decrease in inputs per unit of time. In fact, most of the technological advances
throughout the 19th and the 20th century were of the incremental variety, both in the sense that they
were perfecting discoveries which had already been known for long time (as was the case of the
steam engine) and in the broader sense that they were feeding into a revolutionary new form of
organization of the firm and of society itself, through mechanization, automation and other forms of
vertical integration of technological processes.
It is interesting to reflect on some of the crucial differences between this “second economic
revolution”, as North aptly calls it, and the first one, based on the discovery and expansion of
agricultural activities as a systematic exploitation of domesticated forms of plants and livestock. Two
things immediately come to mind: first, the role of the technology is similar, even though the intensity
appears lower. Second, the technology determines a development of the frontier of agricultural land, a
process that can be compared only imperfectly to the process of urbanization. For the first point, it is
notable that, as in the industrial revolution, in the agricultural revolution throughput also increased
dramatically, both by increasing total output per unit of time and by decreasing the amount of land
and labor necessary to produce a given quantity of output. For the second point, it has to be
recognized that output expansion was mostly obtained by pushing outward the frontier of cultivation
at the expense of forests, pastures and other forms of native destination of the environment.
Productivity increases were, of course, the very product of systematic agriculture, through cultural
practices, the management of water, the application of manure and other organic fertilizer and the
selection of plants and livestock to improve performance. Compared to the industrial revolution ,in
fact, one has the impression that the role of technology for progress in agriculture has been and
continues to be perhaps more crucial, since the organizational changes that can be achieved by
lengthening the value chain are much more limited and entail higher economic and social transaction
costs. It is unclear whether the third economic revolution has occurred in the 1980’s or the sudden
acceleration of productivity from ITC simply corresponds to a cycle within the second economic
revolution. As Table 1 shows, an alternative way to look at technological change is provided by the
Kondratiev - Schumpeter (K-S) view of long term cycles spurred by “waves” of innovation.
Schumpeter, in particular, claimed that the fifty to sixty years business cycles observed by Kondratieff
were determined by the fact that innovations tend to appear in clusters. According with this theory,
peaks of economic prosperity are caused by waves of primary and secondary investments, stimulated
by innovations, and followed by secondary technological changes and further investment. The
inevitable slackening of the process, once the original momentum is lost, cause equally inevitable
petering out of economic growth until another cluster of innovation materializes.
Whether the K-S view of the business cycle is truthfully supported by the data or is just a
suggestive narrative of economic history, what appears interesting in it as well as in North’s more
sweeping account of economic revolutions, is the limited degree of endogeneity recognized to
progress. In both cases, in fact, endogenous growth appears to settle in during the change, but in both
cases the primary motion of the change appears somewhat mysterious, not fully endogenous and not
fully exogenous, be it the technological shift at the basis of the “economic revolutions” or the original
cluster of innovations that are described as the prime movers of the K-S cycle. In denying at once both
the K-S theory and any simple idea of endogenous change, North (1981, p.172), for example, states:
“…The important point is that the Second – as indeed the First – Economic Revolution was the
inflection change in the supply curve of new knowledge, rather than the clustering of a set of
innovations or any of the other characteristics used to describe the Industrial Revolution”. However,
we surmise that more attention should be given to the origin of major technological and economic
changes, with reference to one crucial question: the role of the production and use of energy in
economic development. It is our contention that answering this question may provide the missing link
to explain the possible rise of the next cluster of disruptive innovations in the K-S paradigm, or,
alternatively, the next inflection in the supply curve of new knowledge.
Figure 1
2. Energy: Some Stylized Facts
Energy as an economic good has attracted the imagination of the economists because of its
importance, but also because it is a very general concept, essentially borrowed from physics, very
different in its immaterial nature and overarching scope from the more menial notions of men and
machines of the dismal science. These characteristics invite sweeping generalizations and the search
for fundamentals much beyond the usual attempts at theorizing of consumption and production
economics. Indeed, if we go through the literature on energy economics, we witness a recurrent
characteristic throughout the whole history of economic thought: the desire to capture in a few
stylized facts the properties of an economic good which, in its immaterial and pervasive nature,
appears to be a crucial determinant of our universe.
In his “Three Laws of Energy Transitions” (2007), for example, I. Bashmakov claims that
energy economics may be characterized by three basic laws: the law of stable long-term energy costs
to income ratio; the law of improving energy quality; and the law of growing energy productivity.
According to the author, these three laws are broadly the consequence of limiting thresholds in energy
purchasing power, the asymmetry of the elasticity of energy demand, and the tendency to substitute
lower quality energy forms with higher quality ones. A similar, less recent, attempt, performed by
Georgescu Roegen (1971) and the so called “thermoeconomists”, sought to analyze the evolution of
life and biological equilibrium through the joint use of the laws of thermodynamics and the cost
benefit principles. In their approach they define “exergy”, as the measure of the useful work energy of
a system, and they suggest it as a measure of value. They also characterize the economic systems as
networks of production, distribution and exchange, which are dissipative in terms of matter, energy
and information, and ultimately problematic in terms of sustainable development, complexity,
biodiversity and ecological balance.
Some of the generalizations appear to be based on the idea that factor substitution is only a
short run phenomenon and that it tends to obscure the fact that what is really at work is the attempt to
utilize energy under a more efficient form. For example, Welsch and Ochsen (2005), using German
statistics, claim that in the long-term the share of energy costs over total production costs is constant.
Thus, factor substitution tends to reduce unit costs of production, but not the proportion between the
cost of energy and the cost of the other factors, once their energy content has been accounted for.
Figure 2. Energy Intensity 1850-2005
These constant proportions suggest that the underlying functions are homogenous, as in a
Cobb Douglas production function, with energy claiming a constant share of total output. But this
would imply no energy saving (or energy augmenting) technological progress over a very long time.
Alternatively, we could conjecture that the physical proportion between output and input remained the
same, but, unlike the famous case of Baumol’s disease, energy productivity increases are totally
reflected into price increases. More specifically, denoting with Q and E , respectively the quantity of
output and of energy and with P and p the corresponding prices, we can write:
(1) ( P + Q
dP dQ
dp
)p
E −(p + E
)( PQ) → α (1 + ε ) − (1 + µ ) = 0
dQ dE
dE
where α is output elasticity with respect to energy, ε output price flexibility (the inverse of
elasticity), and µ the energy price flexibility. In this relationship, the only technical supply parameter
is the output elasticity, while the price flexibilities depend on the market for the output and for energy.
Thus, if there is an increase in productivity ( a shock in output elasticity), the price elasticity of
demand for energy will have to go down, or the price elasticity of demand for output will have to
increase to re-establish the equilibrium. On the other hand, if the willingness to pay for energy
increases (i.e. energy price flexibility increases), an increase in productivity, or an increase in output
price flexibility will be needed, if a constant value share of energy is to be maintained.
We can also argue within the scheme of Baumol’s disease, since energy production is certainly
a sector where productivity has increased throughout the centuries, with corresponding price declines.
But energy services, including the provision of energy to industry and consumers, and transportation
services have seen their prices increase more than proportionally, with corresponding increases in
employment and decreases in productivity.
Does this mean that supply factors are more important than demand factors, since the economy
always tries to keep the value share of energy constant? We may recall that Ricardo believed that
supply factors were the ultimate fundamentals of the natural price of commodities and that demand
shocks or adjustments were only a source of market exchange fluctuations. According to an orthodox
Ricardian interpretation, in fact, for energy, increases in production costs will determine price
adjustments - ultimately high enough to bring other sources of energy into production, until exchange
values and profit rates will be ultimately reduced to their natural level, even if demand doubles or
trebles. Thus, impacts of demand expansion are limited to the period required for the supply to adjust.
In this context, the large perspective rise in demand of energy that is going to occur in China
and in India can be interpreted as a temporary phenomenon, whose function is to push up prices,
bringing less productive wells back into production as well as bringing alternative energy sources wind, liquid natural gas, and coal - increasingly on line. The nature of the process of producing energy
is thus changing , with a redistribution of comparative advantage in favor of countries, with large
potential energy resource base. Because the main resources that can be envisaged in this respect are
coal, the sun and the biomasses, countries such as China, the countries with solar power potential
(Egypt, Morocco, the Emirates ecc.) and countries with large agricultural areas (Brazil, Argentina) are
going to capture large benefits from trade if and when the future energy revolution materializes. But,
as exporters of energy and energy services, they will also be vulnerable to price declines in the
production sectors and productivity declines in the service ones.
Table 1: Characteristics of renewable energy sources
Viability
Wind
Wind energy is a
proven
technology.
High altitude wind
power has not been
demonstrated yet at
scale.
Economics
Varies by location.
Depends
also
on
transmission
costs,
storage opportunities,
and cos of alternatives
Risks/co-benefits
No carbon emissions,
but high oppositions
from
environmentalists on
esthetic and cultural
grounds because of
impact on landscape
Improvements
in
complementary
technology
like
transmission
and
energy storage will
facilitate spreading
Wind energy would
potentially meet all the
world’s power needs.
Diffusion
Scale
Comparative
advantage
Mostly countries in
the continental and
temperate zones
Paradigm shift
Locality,
selfsufficiency,
small
scale flexibility
Source: Our elaborations on Barret(2009)
Solar
Photovoltaic
are
proven. Large solar
concentrated
power
projects are being
planned. Space solar
power has not yet
been demonstrated.
Varies by location.
Concentrated
solar
can compete with
fossil fuels in some
sun rich locations at
$35/tCO2
Biomasses
Proven technology. Land
based biomasses with
storagesequestration
yet undemonstrated
Varies by crop and by
location. At this time
biomasses
are
economically inefficient
and
have
higher
emissions. Hope is with
biotechnology and CO2
sequestration/storage.
Risks associated with Negative effects on food
beaming power by prices and availability.
lasers or microwaves.
Risks of solar or
satellites
being
attacked
Depends
complementary
technologies.
on Depends on new biotech
products
Available solar energy Energy from biomasses
exceeds the world’s would potentially meet
total power needs
more than 50% of
world’s power needs
Mostly countries in Mostly countries with
the tropical areas
large land base for field
crops and fast track
deciduous trees
Locality
and Extracting
primary
modularity
energy
through
cultivation and plant
selection
As Table 1 shows, renewable energy sources appear to hold the promise of the most
momentous changes in triggering a new technology revolution. This would happen both because the
development of these sources has a potential for rapid diffusion that goes beyond any other available
technology and can be triggered at prices very close to the ones prevailing at this time. Their
diffusion, furthermore, has all the numbers to cause the famous “paradigm shift” identified by Kuhn
(1961 ). As the last row of Table 1 demonstrates, the paradigm shift mostly consists in a major change
of scale and scope of energy production. In the case of wind and solar technology, this change has
mainly to do with exploiting geographical diversification, modularity and networking. In the case of
biomass, a basic re-orientation of agriculture and forestry would ensue, re-directing a significant part
of these sectors activities to extract energy that can be directly used by mechanical and chemical
systems, rather than by biological ones.
3. The Challenge and the Options of Climate Change
Climate change dramatizes the energy issue. In fact, as explained by a recent literature (see,
for example, the Spring 2009 issue of Economic Perspectives), for many aspects the two issues have
become identical. Stabilizing climate change at 2°c implies stabilizing carbon emissions and both
objectives depend critically on energy technology and the mix of energy sources along the
technological path. Because global warming may induce irreversible changes in the environment, but
also mitigating policies may be entail technological trajectories that cannot be easily reversed,
modeling of irreversibilities and the associated option values and action/inaction thresholds have
dominated one part of the literature on climate change. Papers of this sort include Fisher and Narain
(2002), Gollier et al. (2000), Kolstad (1996a, b), Pindyck (2000), Ulph and Ulph (1997), and several
others. The main notions in these models concerns the so called irreversible abatement capital (IAC),
which embodies the idea of costly irrecoverable investment in both equipment and new technology as
opposed to irreversible damage that inaction may cause because of climate change and the associated
environmental degradation.
In Kolstad’s model, these countervailing factors are embodied in two option values that act in
opposition: the option to wait and learn before costs are sunk into IAC and the option to act to avoid
that GHG accumulation may result into irreversible changes in climate and the environment. Both
options suggest the need to commit resources to new technologies for mitigation and adaptation
purposes beyond a point of no return. On one hand, in fact, while mitigation may be more firmly
related to new technologies, to the extent that adaptation requires costly and irreversible investment
(e.g. migration, relocation of economic activities, commitment to research to adapt rather than to
innovate), an option to wait and learn arises. On the other hand, delaying adaptation may result in
irreversible damages or may cause a loss of the option to effectively adapt.
Ulph and Ulph and Kolstad give sufficient conditions under which the preservation of the existing
climate regime offers alternative options to wait or to act. In the result obtained by Epstein and others,
an inequality involving the third derivative of the utility function determines whether climate change
may be associated with a threshold of action that cannot be ignored . The intuition is that the third
derivative is associated with a propensity to increase savings as uncertainty increases, an attitude that
receives the name of “prudence” in the literature. Thus, a sufficiently high degree of prudence implies
that decision makers associate a positive value to commit resources in order to preserve the possibility
of future action. This might be irreversibly lost otherwise. In the case of adaptation, a similar
argument can be made, since prudence implies that investment may be made to preserve the option to
adapt, which may be irreversibly lost if timely steps are not taken to adjust to climate changes.
Fisher and Narain note that the consequences of irreversibility of abatement investment depend on
whether one defines irreversibility as the durability of capital, or its “non shiftability” to other uses, in
the sense of earlier growth theory ( Arrow and Kurz, 1970). The latter case seems to be particularly
important for adaptation, in the sense that countervailing real options to “wait and learn” or “to act
and learn” would emerge more strongly where projects would commit resources to adapt to climate
change, through new technologies, relocation, reuse or other forms of specialized adaptations. In these
cases, committing substantial “non shiftable” resources would be determinant in the direction and the
momentum of the technological path eventually chosen.
Pindyck elaborates on the same theme by using a multi-period stochastic optimal growth model.
While he can only provide numerical solutions, his comments are clear: “I have focused largely on a
one-time policy adoption to reduce emissions of a pollutant. If the policy imposes sunk costs on
society, and if it can be delayed, there is an opportunity cost of adopting the policy now rather than
waiting for more information. This is analogous to the incentive to wait that arises with irreversible
investment decisions. In the case of environmental policy, however, this opportunity cost must be
balanced against the opportunity “benefit” of early action – a reduced stock of pollutant that might
decay only slowly, imposing irreversible costs on society. In the simple models presented in this
paper, an increase in uncertainty, whether over future costs and benefits of reduced emissions, or over
the evolution of the stock of pollutant, leads to a higher threshold for policy adoption. This is because
policy adoption involves a sunk cost associated with a discrete reduction in the entire trajectory of
future emissions, whereas inaction over any small time interval only involves continued emissions
over that interval. The validity of this result depends on the extent to which environmental policy is
indeed irreversible, in the sense of involving commitments to future flows of sunk costs”. An
implication of this result is that it holds also for adaptation policies that require a longer term,
irreversible commitment to a certain course of action, since the payoff for waiting before engaging in
such a binding commitment would tend to be greater than the payoff from immediate action. Flexible
adaptation policies, on the other hand, would not suffer from a similar handicap, as compared to small
postponements and would tend to be acceptable on the basis of a simple trade off with the wait and
learn alternative. Project design thus again becomes crucial, in that adequate flexibility options are
required to overcome the weight of the deferment option, when there is uncertainty and new
information unfolding over time.
Gollier et al. (2000) use the idea of the “precautionary principle” to sketch out a general approach to a
strategy of action toward climate change. They quote the 1992 Rio Declaration (Article 15) as a statement of this: “where there are threats of serious and irreversible damage, lack of full scientific
certainty shall not be used as a reason for postponing cost-effective measures to prevent
environmental degradation”. Their interpretation of this principle is that it arises from the two
contrasting effects of a “wait-learn-and-act prevention policy as opposed to an act-learn-and –act one
in presence of information that becomes available over time. Applying the first policy reduces the risk
of engaging in more costly investment than it would be necessary, but increases the risk of doing
insufficient prevention and suffer more in the future. Engaging in the second policy, on the other
hand, reduces future risks but may generate higher costs in the short run. The balancing of these two
policies, according to the authors, depend on the shape of the utility function and, in particular, on its
third derivative.
On the pure adaptation front, Smith and Lenhart (1996) and Smith(1997) confront the problem of
evaluating anticipatory adaptation policies using implementability and net benefits as basis for
evaluation. Tol et al(1999), on the other hand, take a disaster management point of view and suggest
economic viability, public acceptance, environmental sustainability and behavioral flexibility as
evaluative criteria. These approaches (see also Klein and Tol (1997), UNEP, 1998) appear to advocate
the use of multicriteria methods, as in the analysis of environmental impacts, even though they
describe several evaluation methods .
4 Conclusions: Is a new technological revolution in the making?
Two unexpected characteristics of technology revolutions appear to be, according to several
influential authors ( North, Kuhn and Foucault are three outstanding examples) that (i) they do not
depend on technological discoveries, however important and, (ii) that they require momentous
changes in beliefs, social behavior and models of thinking. North (1984), for example, claims that
most of the technology of the industrial revolution in the 1800’s had been available since the previous
century, but the revolution came about only when the stock of knowledge and the organization of
society together were ready to utilize the innovations to foster institutional change. Kuhn’s (1962)
paradigm shifts determine a scientific revolution by changing the entire model of interpretation of the
world, thereby making the single advancements in science a byproduct of more momentous changes
in the relationship between knowledge and the social setting (the wissensociologie) and in the vision
of reality (the weltanschauung). According to Foucault, on the other hand, as Andrew Feenberg
(1991) suggests, power/knowledge is a web of social forces and tensions in which everyone is caught
as both subject and object. This web is constructed around techniques, some of them materialized in
machines, architecture, or other devices, others embodied in standardized forms of behavior that do
not so much coerce and suppress the individuals as guide them toward more productive use of their
bodies. Thus, technological innovations do not determine social changes, but a pool of new
technologies is always available when society is mature for it.
More generally, Schumpeter suggested that innovations tend to occur in clusters, as a
consequence of positive externalities, the spill over of knowledge, the rise of general purpose
technologies and the growth of information and communication networks. Paradigm changes can thus
be expected and are as much the effect of the clusters of innovations as the causes of it. In what has
been called “the Schumpeterian renaissance”, a critical mass of innovations and the ensuing
momentous changes in the economic, cultural and scientific environment can be seen as the engine of
endogenous growth.
Are we near an energy technological revolution? Two elements that seem to point in this
direction are the rising scarcity of fossil fuels and the increasing damage that their use is making to the
planet. Climate change has made the small miracle of concentrating the attention of scientists and
politicians on a single parameter: the price of carbon, whose opportunity cost is roughly $200 per ton
in terms of abatement and only about $43 in terms of carbon market trading. Given that we need an
energy revolution both to foster economic growth and save the planet, it seems reasonable to argue
that rising the carbon price to its full opportunity cost would be a powerful instrument to move in the
right direction. A sufficiently high increase in carbon prices would thus push the world economy to
the range of adoption of a cluster of technologies that are already available and could, by their critical
mass, determine a paradigm shift.
Yet, there are several elements of ambiguity that render problematic both the prediction of an
energy led technology revolution and the prescription of a higher carbon price.
First, is society really ready to accept much higher energy prices in order to save the environment?
Valuation studies seem to suggest otherwise, as people consistently show willingness to pay for the
environment at less than 1% of their income (Pearce and Moran, 1994).
Second, the social cost of climate change is highly uncertain. A meta-analysis of 232 published
estimates (Tol, 2009) shows a marginal cost of carbon of $105 per ton of carbon, but a model estimate
of only $13/tC, with an estimate at the 99th percentile of $1500/tC. These large differences in part
depend on the different social rates of return used in these studies, but is also a reflection of a basic
disagreement on how to account for the fact that future generations are being affected by decisions
taken today.
Also, black swan meteorological events, even though becoming more likely with climate change,
remain elusive in that their probability remains low beyond the threshold of appreciation.
Table 2: Impact of a carbon price increase on renewable energy sources
Wind
Minor increase
Wind energy would
become
more
attractive and would
(from $40 to $80 )
spread
further
in
many
locations.
Investment in energy
storage
and
high
altitude wind power
would increase
Moderate
Network and storage
projects. Selected high
Increase (from $80 to altitude wind power
projects would go over
$100)
threshold of economic
convenience.
High Increase (from Network and storage
$100 to $200)
financing
would
become
acceptable.
High altitude projects
enhanced.
Solar
Photovoltaic projects
and
large
solar
concentrated
power
projects would be
boosted. Space solar
power projects would
enter
active
experimentation.
Biomasses
No major effect on
current
biomass
programs.
R&D
in
Storage- sequestration
projects.
Varies by location.
Threshold
of
economic
convenience
with
respect to fossil fuels
alternatives would be
crossed.
Fully
economically
convenient
without
subsidies.
Satellite
systems and space
projects adopted.
No major effect unless
C=2 emission solved
through
storage
–
sequestration projects
Major investment in
biotech, and storage and
sequestration projects.
Major
effects
on
transport.
Source: Our elaborations
Second, it is not clear how to “lock in” any series of policy changes into an irreversible
collective choice that would give the private agents the incentives needed to commit long term
resources to low carbon research and technology. Before entering the “virtuous circle” of an energy
revolution, it thus seems that we have to solve the problem of breaking the “vicious circle” of time
inconsistency of public policies and its associated lack of credibility. In this regard, the situation is
made more difficult by the fact that there is an open question on the decline in the growth rate fostered
by climate change. Would it be just a temporary inflection in the growth curve of the world economy
or should we just accept it as a permanent fall in our standards of living and try to adapt downward?
Also, would it mainly weigh on the low income countries, posing additional problems of distribution
and unfair burden on the poor?
Third, long term effects (beyond 2100) have not been estimated or even considered and they
would depend, more than short term effects, on the policies implemented, their size, their timeliness
and their appropriateness. But the amount of research brought to bear on these issues is minimal, and,
as a consequence, the degree of uncertainty on how to proceed is huge. The energy revolution is being
advocated on the basis of irreversible impending damage to the environment, rather than, as before,
because of depletion of fossil fuel deposits. While this may make the argument more dignified, it does
not necessarily make it more convincing.
Beyond these doubts there is the reality of many technologies that appear ready to be used,
offer high potential for growth and are already being implemented on a relatively large scale. These
technologies are themselves rapidly changing and offer high hopes for second or third generation
products that could be truly revolutionary. The dynamics of demand and the structure of comparative
advantage also appear to be affected in a potentially dramatic way, but only time will tell whether the
revolution is already among us or is yet to come.
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